5 Bank Stocks To Buy As Q4 Earnings Impress

Probably the biggest beneficiary of Donald Trump’s electoral victory, bank stocks have been on a tear ever since election results were announced on Nov 8. The KBW Nasdaq Bank Index gained around 25% between Nov 8 and Dec 9 and has since then traded within a narrow bound as investors await firmer signals on the policy front from the new administration.

However, the tone of recently released banking results indicates that the sector may soon be moving higher. A series of positive earnings surprises has brightened the profit outlook for the sector and adding bank stocks to your portfolio would be a very smart option.

Bellwether Earnings Shine

Last Friday, indexes rode higher on better than expected bank earnings. Among those beating estimates for the fourth quarter was Wells Fargo & Company (WFC - Free Report) , Bank of America Corp. (BAC - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) and The PNC Financial Services Group, Inc. (PNC - Free Report) . Nearly all of these heavyweights also posted year-over-year earnings improvements though there was some weakness on the revenue front.

Top executives from these banks also expressed confidence about business prospects in their first public statements since the declaration of election results. Several analysts and market watchers believe that encouraging results and guidance from bellwethers reporting over the next few weeks could propel the sector upward.

Sector Prospects Bright, Small Banks to Gain

Banks are poised to gain from two key tailwinds in the near future. Firstly, the Fed is likely to speed up the pace of rate hikes this year which will results in higher margins for the banks. Secondly, the President-elect has made a promise to deregulate the banking sector, one which he is likely to keep given the large number of prominent bankers finding place in his administration.

Meanwhile, smaller banks are likely to reap the benefits of the Fed’s attempts to reduce the sector’s risk ahead of the presidential handover. According to the final standard issued by the central bank, large banks will have to hold a minimum level of total loss absorbing capacity. This increase in capitalization is designed at protecting depositors from steep losses. Meanwhile, banks with less than $250 billion in assets will be exempt from these norms, a rule which is likely to push up their stock prices relatively higher.

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